The Cyclical, the Structural, and the Politics

May 8th, 2012 at 9:33 am

The reaction to the continued slog in many of the advanced economies, the French and Greek elections—widely viewed as referenda on austerity measures, and our own budget/election year politics are generating, if not a lot of useful policy, a bunch of interesting commentary.

All told, it’s a portentous moment for political economy—one that poses truly existential questions. Should policy give up on the short-term problems of demand contraction and sectoral screw-ups, like housing, and focus on the structural problems—debt bubbles, inequality, wage stagnation, deregulation—that got us all into this mess? Is our politics, or that of Europe, even capable of answering and acting on questions of such magnitude?

Ezra Klein and David Brooks both discuss the division between cyclical and structural interventions, with Brooks coming down on the side of structural. If ever there was a false choice, this is it. Of course we have to do both, and if anything, they’re complements, not substitutes. At some point, and we’re getting closer every quarter, the cyclical morphs into the structural, as when long-term unemployment—a function of the cyclical demand contraction—erodes skills or spirits to the point where people drop out of the job market for good.

That said, it’s good to see more economists and commentators recognizing the need to fix structural problems. The baseline economic assumption is still: intervene only in obvious market failures, like recessions—and even that has somehow become controversial. The view from most econ departments was the long-term will take care of itself, and the less policy nudges the free hand the better. Perhaps enough folks are starting to recognize that too often the free hand can be all thumbs.

But can our politics deliver on any of the needed policy, be it short or longer-term? Clearly not at the federal level, though some states are starting to act (more on that in a later post).

To his credit, President Obama is apparently about to go to Congress with a number of ideas from recent proposals targeted at both jobs and housing. These include onshoring bonuses, a tax credit for businesses that increase their payrolls, another credit for manufacturing clean energy equipment, and added incentives for mortgage refinancing.

Of course, Congress will block him but these are the right ideas for the moment (I’d definitely add state fiscal relief, which was another component of his Jobs Act from last year). But the President is right to elevate these differences right now. The problem is that the politics are all so topsy-turvy, it’s hard for anyone paying attention to figure out who stands for what.

In this regard, I thought Martin Bashir made an interesting point on this segment from yesterday. If you look at their budgets, as we have at CBPP, Gov Romney and Rep Paul Ryan (author of the House R’s budget) are extremely austere in the short and particularly long runs. Gov Romney, in his economic plan, for example, explicitly eschews any measures to address the near-term cyclical contraction. Whether it’s housing, autos, unemployment, his solutions are supply-side, trickle-down tax policies and deregulation, all of which are geared to longer-term growth—and none of which work, btw.

This is austerity, the very type of thinking that is roiling European politics. Yet, as Bashir emphasizes, Gov Romney accuses the President—who, as noted, is clearly trying to push the other way—as embracing European policies. Listen to what Gov Romney says in the clip: “He’s [Obama] taking America on a path toward Europe, and it’s not working there…Europe’s in real trouble…it’s not gonna work here.”

Um…is he talking about austerity?! It sure sounds like it. And if so, Bashir is right that this is all very much upside down: the President is trying to push the other way, the R’s are blocking him, and the Gov’s own agenda is drawn from the same austere deck that’s blocking recovery both here and abroad.

4 comments in reply to "The Cyclical, the Structural, and the Politics"

We are stuck in this slog because the uber-rich of the extreme right has decided to abandon the New Deal compromise and launch a class war against the 99%. This is not ideological hot air. Protection of rich financial criminals, bailouts of fraudulent corporations, planetary environmental poisoning, the intentional promotion of bubbles, and the exploitation of natural and political disasters to further enrich the rich constitute the 21st century weapons of choice for class warfare. Wealth should be built on a rich society, not the zero-sum game of the rich stealing from the poor.

The key to solving the problem is for Americans to realize that war abroad and theft at home are two sides of the same coin. Socially conscious domestic policy (policy designed to care for the 99%) does not fit well with a foreign policy based on force. Such a combination would constitute a self-contradictory combination. To put it simply, leaders of imperialist campaigns see citizens as cannon fodder, not those they serve. Moreover, force (more specifically, the American way of high-tech war) is expensive.

Were the uber-rich (e.g., Romney, the Koch brothers, Mozillo, the CEO’s of the horde of war profiteer corporations like Halliburton, and the officials of Big Oil) to pay their fair share for their privileges, enormous strides toward bringing America back could be made. There is much to be done – creating a world-class solar industry, cleaning up New Orleans…

Unfortunately, though I take your point that Obama may not personally be primarily to blame for this, the Obama Administration remains stuck in essentially a neo-con foreign policy of playing a zero-sum game of U.S. supremacy at the expense of justice for Muslim societies and a “neo-liberal” (i.e., very conservative, exploitative) domestic policy of protecting billionaires at the expense of society.

Portentous times, indeed; in another browser window, the news shows deep social turmoil and a resurgence in attempts at citizenship across Europe.

But suppose Mr. Obama proposes mortgage relief, and/or jobs stimulus? Talking about ‘mortgage relief’ or stimulus just puts more lipstick on the pig that has been captured by the processes involved in capital formation and financial manipulation.

Romney is a High Priest of the processes of capital formation. But what galls me is his cluelessness about the fact that the processes involved in capital formation cannot function without government. As government loses control of the processes involved in capital formation and asset creation, we become subject only to the amoral, predatory vagaries of ‘market forces’. And as non-government processes for capital creation take prominence, the ratio of legitimate wealth to fraudulent wealth begins to decline.

To wit: Hernando de Soto’s work on capital formation (“The Mystery of Capital”) remains, in my view, one of the more intriguing works of modern economics.

de Soto details the representational processes by which capital is originally formed — ‘things described’, written down, and recorded in local government offices then become assets (against which capital can be lent). This system of public records, specifically land recording systems, traditionally was built over generations by the patient labors of people working in local governments.

In other words, de Soto traces ‘wealth’ back to its origins and argues that most ‘assets’ originate as government documents held in local city and county offices in every jurisdiction in the West, going back in time all the way to Mesopotamia. (I don’t agree with all of de Soto, but this point of his is quite powerful, yet seems to be overlooked by neoliberals.)

As a True Believer in finance, Romney appears clueless that the very processes that underlie his success — his securities, his assets, his many forms of ‘capital’ — are deeply embedded in public documents, public processes, a system of laws and courts, and originate in what any reasonable person would call “local” government. Because local government is, if you will, the humus, the rich soil, which civil society needs to take root. Without access to these systems of wealth creation and recording at the local level, there is no fertile garden in which markets can grow.

However, for about 30 years, under the influence of those who control capital formation and manipulation (finance, banks, hedge funds), the processes of *local* government land recording have been gutted, removed from the public domain, and ‘privatized’.

The premier example is MERS, which was built as a private system for recording mortgages. MERS was a nationalized system for recording mortgages, but because it became disconnected from any underlying system of local recording, it must rely on political influence to enforce its claims for the value of its assets. This raises questions for government legitimacy; do we now pay taxes to protect and support private entities like MERS? Are our tax dollars really supposed to be used to pass off mortgage fraud under the guise of ‘mortgage relief’, while the banks and hedge funds continue to get free passes?! Was the value of the mortgages MERS and the banks claimed to have on their books ever legitimate? (Certainly not!) So why are we covering up their losses?!

What we seem to have is an increasing problem of delegitimized government, which in too many instances slit its own throat via the Free Market ideology of the last 30 years. I agree with David Brooks that ‘the jig is up’, but I don’t see that as a terrible thing; the old system was designed to protect rent extraction, and a networked world needs something more adaptable and far more productive.

If Mr. Obama settles for mortgage relief — without explaining to the American people that the problems in the capital markets, in asset classes, in mortgage fraud cannot be fundamentally fixed until and unless we enforce the rule of law (which requires government) — then he’s just pouring more gas on the fires of fraudulent capital creation that have made such a mess of the world.

I don’t believe Romney can recognize the fundamental problem posed by fraudulent capital creation. For that reason, I don’t believe Romney could begin to create the conditions for legitimate wealth creation going forward; he’s terrific at wealth extraction and rent, but when it comes to innovation and transformational change, the poor man appears to be at a loss.

However, I don’t hear Obama really speaking about the fact that so many of our problems originate in fraudulent capital creation, and that without good, simple government systems — many of them controlled and implemented at the *local* level — our ability to create wealth into the future are going to be severely compromised.

Q37. Do you think Mitt Romney says what he believes most of the time, or does he say what he thinks people want to hear?
4/13-17/12* [registered voters only]
What he believes 27
What people want to hear 62

Q27. Do you think Barack Obama says what he believes most of the time, or does he say what he thinks people want to hear?
Says what he believes 46
Says what people want 51

Q19. If the 2012 presidential election were being held today and the candidates were Barack Obama, the Democrat, and Mitt Romney, the Republican, would you vote for Barack Obama or Mitt Romney?
Obama 46
Romney 46